Inventory Management Part II

Dr. Deepu Philip

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Production Quantity Model

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Variation of EOQ model when the assumption on orders are received all at once is relaxed
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Called as the non-instantaneous receipt model or gradual usage model or production lot-size model

Order quantity is received gradually over time and the inventory level is depleted at the same time as being replenished Commonly found when the inventory user is also the producer like manufacturing operation where parts are used to produce a large assembly
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Non-instantaneous Receipt model

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Main Considerations
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Let, p => daily rate at which order is received over time, called production rate d => daily rate at which inventory is demanded Since no shortage p > d
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What about p = d?

Maximum inventory level is not Q, but somewhat less than Q adjusted for depletion during order receipt period Ordering costs do not change dependent only on number of annual orders Carrying costs change as the average inventory level is different
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Mathematical Considerations
Time required to receive an order

Q(1 d/p)

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Quantity Discounts
Price discount on an item if predetermined numbers of units are ordered } Usually given for ordering materials and supplies in high volume } Basic EOQ model can be applied with appropriate modifications total cost function must now include the purchase price of the item being ordered
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Where P = per unit item price, D = annual demand

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Quantity Discount Considerations

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Purchase price is not part of the basic EOQ model as it has no impact on the optimal order size
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Optimal order size is the same whatever the purchase prize is

When discount available => associated with specific order size

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Usually different from optimal order size Evaluate trade-off between possibly higher carrying costs with discount versus EOQ cost Thus purchase prize affect the order size decision

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Quantity Discount Graph

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Reorder Point
All discussions so far focused on how much to order } The second part of the decision is when to order } In a continuous inventory system, the determinant of when to order is called as reorder point
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Inventory level at which new order is placed

Basic EOQ model with constant demand and constant lead time is the amount demanded during lead time
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R = d*L; where d demand rate per period, and L lead time

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Reorder Point Example - 1

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Consider that a store is open for 311 days a year. If the annual demand is 10,000 units and the lead time to receive an order is 10 days, determine the reorder point. The inventory management is done through continuous review system.

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